Family Owned Business – How to plan to for Family Wealth to pass through multiple generations

Evanna Phoon wrote the below article and she is a Senior Franchisee of Rockwills. She can be contacted at info@malaysiawills.com

In the previous six issues, we have been exploring very in-depth on business exit planning with a proper buy sell or cross option agreement. As I mentioned in my first issue, there are basically two category of business.

  1. Business partnerships among friends, sibling and relative
  2. Business among family member or family owned business

Business exit planning is used when planning for the first category of business partnership. For the second type of partnership, the planning is completely different as the business owners have no intention to sell the business interest to an outsider but they hope to pass down their wealth and business legacy that they build to their descendant.

In summary, the exit planning for a family owned business is family succession.

Before we go into the technical details and how-to plan for a successful family business succession for family businesses. We’ll share a bit more about some unique facts of Malaysia SME families. In Malaysia, the family base keeps on growing larger and larger by generation and will be in a form of a pyramid shape. For example, a couple might have four children and the four children will get married and have a couple more children of their own. The multiplication goes on. In fact, this is what happens to most of Asia family except for China.

Rockwills, Rockwills Malaysia, Will Writing

In china, the wealth of a couple in family business will pass down to their only child. This only child then marries to the only child from another family and their wealth will then be channelled down to their only child.

Therefore, planning for Malaysia SME is vastly different from planning for a China SME. It requires a lot of time and effort to scope out the unique characteristic of each family business.

The next scenario that we commonly see among Malaysia SME family business is that their assets are diversified across different jurisdictions or countries. It is not uncommon for Malaysia SME business owners owning properties outside of Malaysia, for example a house in Scotland, a bungalow in Australia, an apartment in America, or some public listed shares in NYSE etc. This diversification will create complication when the business owners eventually pass away. The reason is because some countries will have inheritance tax and by owning a property in that country, then they will be subjected to pay for the inheritance tax for that country.

One simple example that I’ll illustrate here is, a Malaysian Business owner bought a property in London because his daughter is studying there. If upon his death the property is worth £1million, the UK government will be imposing an inheritance tax of 40% off nil band rates.

That is the reason why business owners should always think carefully and get professional advice about the exit strategies before purchasing any property or engage in any joint ventures partnerships in foreign countries.

Besides properties being diversified globally, their family members might also be geographical dispersed across different countries. Most of Malaysia SME families that we talk to tend to their children to study abroad, outside of Malaysia. They might have a son in Australia, a daughter in Canada, another daughter UK. And after they send the children overseas, they can’t tell them not to fall in love, not to get married and settle down overseas. Some children might choose to settle down overseas due to work commitments. In the event they get married, for example the daughter married to a Canadian. It’ll pose certain challenge when it comes to passing on properties to the daughter.

Let’s say the mother blessed her daughter (that married to the Canadian) with a RM 10 million worth of properties in Malaysia and the annual rental collected is RM 1 million. Because Canada practices worldwide taxation, therefore any income arises outside of Canada will all so need to be reported to the Canadian government. This means that from the RM 1 million rentals collected, a portion of the income will be taxed by Canada government. This is where proper exit planning is needed.

In the next issue, we’ll explore on the key concerns of Malaysia SME with regards to their family business, family wealth and family legacy.

 

About the Author:

MalaysiaWills CEO Evanna Phoon

Evanna Phoon is CEO & Founder of www.MalaysiaWills.com, Malaysia’s first online will writing service provider for Rockwills Corporation Sdn Bhd & as-Salihin Trustee Bhd. Visit her website to download FREE ebooks  www.MalaysiaWills.com & watch over 300+ videos on the topic of Will Writing for Personal & Business. She can be contacted via info@malaysiawills.com.

 

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Monday, April 16th, 2012 article

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